ECB Raises Rates to Balance Inflation and Financial Stability Risks
The European Central Bank (ECB) on Thursday announced a further rate hike of 50 basis points, signaling it is ready to supply liquidity to banks if needed, amid recent turmoil in the banking sector. The interest rate on the ECB’s main refinancing operations will rise to 3.50%, while the deposit facility rate will rise to 3.0% and the marginal lending rate to 3.75%.[0]
“Inflation is projected to remain too high for too long. Therefore, the Governing Council today decided to increase the three key ECB interest rates by 50 basis points, in line with its determination to ensure the timely return of inflation to the 2% medium-term target,” the ECB said in a statement.
Inflation data support ongoing hawkish rhetoric at the ECB but financial stability risk has markets substantially re-price the path for policy rates lower.[1] The ECB’s policy toolkit is fully equipped to provide liquidity support to the euro area financial system if needed and to preserve the smooth transmission of monetary policy.
The ECB also revised up its inflation expectations.[2] This year's headline inflation is estimated to be at an average of 5.3%, while 2024 is projected to have a rate of 2.[3] Simultaneously, the single currency bloc's growth forecasts were increased, and a GDP growth rate of 1% is now expected in 2021.[4]
The ECB announced on Thursday that its governing council is intently overseeing present market stress and is equipped to act when necessary to protect price stability and financial stability in the euro area, without referencing the overnight rescue loan.
Given the ECB’s strong guidance around a 50bp hike at the March meeting, the bank's policy toolkit is fully equipped to provide liquidity support to the euro area financial system if needed and to preserve the smooth transmission of monetary policy. The ECB is balancing inflation and financial stability risks and is standing ready to respond as necessary to preserve price stability and financial stability in the euro area.
0. “ECB raises eurozone interest rate despite banking sector fears” The Guardian, 16 Mar. 2023, https://www.theguardian.com/business/2023/mar/16/ecb-raises-interest-rates-despite-banking-fears-credit-suisse
1. “Rates Spark: ECB, part of the solution or part of the problem” ING Think, 16 Mar. 2023, https://think.ing.com/articles/rates-spark-ecb-part-of-the-solution-of-part-of-the-problem
2. “European Central Bank hikes rates despite market mayhem, pledges support if needed” CNBC, 16 Mar. 2023, https://www.cnbc.com/2023/03/16/ecb-rate-decision-march-meeting-lagarde-announces-new-rate-hike.html
3. “Full statement from the ECB for the March 2023” ForexLive, 16 Mar. 2023, https://www.forexlive.com/centralbank/full-statement-for-the-ecb-20230316/
4. “ECB raises rates by 50 basis points, as inflation trumps financial stability fear By Investing.com” Investing.com, 16 Mar. 2023, https://www.investing.com/news/economy/ecb-raises-rates-by-50-basis-points-as-inflation-trumps-financial-stability-fear-3032496
